Endogenous selection of comparison groups, human capital formation, and tax policy

Stark, Oded and Hyll, Walter and Wang, Yong (2010): Endogenous selection of comparison groups, human capital formation, and tax policy. Forthcoming in: Economica

Abstract

This paper considers a setting in which the acquisition of human capital entails a change of location in social space that causes individuals to revise their comparison groups. Skill levels are viewed as occupational groups, and moving up the skill ladder by acquiring additional human capital, which in itself is rewarding, leads to a shift in the individual’s inclination to compare himself with a different, and on average better-paid, comparison group, which in itself is penalizing. The paper sheds new light on the dynamics of human capital formation, and suggests novel policy interventions to encourage human capital formation in the aggregate and, at the same time, reduce inter-group income inequality.

• Item Type: MPRA Paper
• Language: English
• Keywords: Human capital formation; Skill levels as occupational groups; Interpersonal comparisons; Relative deprivation; Tax policy; Subsidization
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H24 - Personal Income and Other Nonbusiness Taxes and Subsidies; J - Labor and Demographic Economics > J2 - Demand and Supply of Labor > J24 - Human Capital ; Skills ; Occupational Choice ; Labor Productivity

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